What do yieldcos TerraForm Power and TerraForm Global have in common with Macaulay Culkin? They learned the hard way. Just like the ill-fated child star whose parent managers squandered his fortunes, never trust your ‘parents’ with the money.

 

The financial woes and strategic missteps of SunEdison, which filed for bankruptcy protection on April 21st, have weighed on its two yieldco subsidiaries for months. So much so that when the former renewable energy darling finally made its long expected bankruptcy official, the share prices of TerraForm Power and TerraForm Global jumped by 5% and 10%, respectively. Speculation was that SunEdison would drag the yieldcos into Chapter 11 with it, but their absence from the filing caused a burst of buying.

 

All of which raises the question: When it comes to yieldcos, is the real issue rooted in the character of your parents?

 

From the beginning, many have argued that the yieldco structure itself is inherently flawed, largely because it requires continuous growth through the acquisition of assets, which are mainly wind and solar PV projects. These projects generally come from the parent company in the form of a “dropdown”— otherwise deemed by Enel CEO Francesco Starace as, “a monster that you have to feed.” When looking at yieldcos on the other side of the Atlantic, it is clear that European investors do not fancy having their hands bitten.

 

The difference comes down to the question of valuation. In the U.S. and Canada, investors consider yieldcos growth stocks, and they expect an escalating stream of dividends per share as the yieldco builds its project portfolio. In the U.K. and Europe, yieldcos are seen more as sedate vehicles for the risk averse—they pay a steady yield of 6% or so and their shares trade based on the net value of current assets, not projected growth.

 

Of course, 6% may not appeal to everyone, so let us assume North American yieldcos maintain their current structure and valuation metrics. Are they all the same? Some would say, unequivocally, no. While the TerraForms have been negatively impacted by the financial woes of their parent—indeed, SunEdison was so set on growth at all costs, it forced its yieldcos to load up on debt to buy overpriced assets—other yieldcos have not, and in fact are currently undervalued.

 

Two good examples that analysts point to are NextEra Energy Partners and 3Point8 Energy Partners. Both of these yieldcos have projected long-term annual distribution growth of 12%-15% and parents with strong financials and manageable debt. 3Point8 Energy is also aided by its two sponsors, SunPower and First Solar, which happen to be two of the largest and best-run solar companies in the country. They plan to sell the yieldco a massive backlog of dropdowns—consisting of 1.21 GW of solar projects—over the next couple of years, potentially quadrupling its cash flow-generating capacity.

Then there are yieldcos such as Brookfield Renewable Energy Partners and Hannon Armstrong Sustainable Infrastructure, which develop projects internally, and Pattern Energy Group, which has a private sponsor with protections in place to avoid conflicts of interest.

 

Of course, there are still risks, and some argue that the yieldco structure will be tested even further when interest rates rise. But for those willing to jump in, remember Macaulay Culkin. Not all parents are created equal.